Mathematical genius
David Walsh
has never liked leaving things to chance. He’s made a fortune by taking it out of gambling and his secretive Punters Club has been spectacularly profitable as a result.

Worth an estimated $2.4 billion, his global gaming business also delivered for the mug punters as this idiosyncratic gambling genius had, by 2011, become a famed art benefactor. He is acclaimed for one brilliant conception: the Museum of Old and New Art on the shores of Tasmania’s Derwent River.

IN DEPTH

The Financial Review’s ‘Gambler’ series: The inside story on the secretive Australian gambling syndicate that turned over billions

Lauded by art critics and a huge popular success, MONA is a triumph of meticulous planning by Walsh and his willingness to invest in a vision splendid. Yet he and his gallery came from nowhere, so many asked the obvious question: where did the money come from?

As it turned out the Australian Taxation Office had been asking the same question for years. Naturally, Walsh and the group of 19 hand-picked members of the Punters Club left nothing to chance on this score either. They had a carefully worked out strategy, which was just as well as the club, which turns over billions a year, had the attention of the ATO for more than two decades.

Last year when it jumped on the club, many of its members faced huge retrospective tax assessments believed to be close to $541 million, including penalties and interest.

Walsh, the only one of the group with a public profile he was prepared to exploit, drew his sword in the court of public opinion, accusing the ATO of acting unfairly and immorally. Then there were whispers the ATO action could destroy MONA.

But behind all the noise Walsh and his fellow punters had a plan.

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Secret documents uncovered by the Weekend Financial Review show the Punters Club had mapped out a strategy to deal with the Tax Office’s interrogations as early as 2003 and orchestrated a strategy to beat the odds. This was no game of chance.

It was their unprecedented success that attracted the ATO’s attention in the first place.

Their friendship forged in the dingy hallways of the University of Tasmania in the late 1970s, Walsh and
Zeljko Ranogajec
swapped textbooks for cards. Both had a love of gambling and frequented the Wrest Point Casino, just across the road from the university. While both failed to finish their degrees, the time had not been wasted.

Reclusive gambling genius and renowned blackjack player Ranogajec would be head of the club.

By the late 1980s they joined a similar syndicate operating in South Australia and recruited Adelaide boys David Steicke and Ray Gatt. Together, the clubs became a formidable force known as the Bankroll, later to be dubbed the Punters Club by the ATO.

They beat the system using complex computer programming and algorithms, even negotiating rebates with the TABs, enabling them a certain return on losing bets.

It was about the time they merged resources that the ATO tuned in.

Under Australian law, gambling income is only taxable if it is part of a business. The ATO reviewed the club’s operations as early as 1991 but concluded they were not taxable and in December 1990 provided advice to that effect.

By the early 2000s, the watchdog had another look.

By then the club had a strategy and prepared what is virtually an instruction manual to its members to guide them in how to respond to ATO queries. It is not known who prepared it, but it has been speculated it could have been a professional services firm, possibly KPMG, which provided advice to the club around the same period.

It looks like the sort of professional advice that is sought by wealthy individuals in relation to ATO queries. The club would have known its enormous profits were at risk should the ATO deem it a business.

The document advised them to tell the Tax Office they were using the same “basic betting techniques" as in the early ’90s but that turnover had simply increased.

“The ATO advice in December 1990 was correct," the document states. “That ATO view, supported by various case law, was that a betting operation does not become a business because the outlays and winnings become larger.

“We should use that conclusion as a weapon and seek to shift the burden on to the ATO to support their contention should they indicate a disposition towards changing their view concerning the existence of a business."

The advice was simple: do not educate the ATO; do not guess or invent (it will backfire); do not lie (it will also backfire); and “do not belittle the ATO people, they will seek to get their revenge".

Do, however, the document suggested, “size up the ATO people and determine whether their lack of knowledge can be used to our advantage", the document says. “It’s just another game – follow the rules and we can reduce the element of chance!"

The punters were encouraged to talk at length on “comfortable" questions to reduce time on more contentious matters. Focus on the lack of formal agreements, regular meetings, distributions, records or documents detailing interests but stay away from horse racing.

The club should emphasise it was not involved in “activities such as horse ownership, racing, breeding", the document says.

On the troublesome list were questions about the punters sources of income and the turnover and net winnings from gambling.

The document suggests, if asked how much the syndicate wins, the punters should answer that “no records are kept therefore difficult to estimate turnover or profit and I would prefer not to make a guess".

The punters should also say they “are not aware of all the members" of the syndicate, would need to check who distributed the funds and which bank account they came from.

Net wealth was problematic, as well as what assets were owned and where the income that paid for them came from. And if asked “do you have/control trusts that hold investments?",the document says, “This question is best avoided. Provided you are neither a trustee, appointor or named beneficiary you can answer that you do not have or control any trust."

In the murky world of lucrative gambling, the stakes had just been raised. The wheels were in motion and the club was ready to play hard ball.

Behind closed doors, the ATO investigation continued to bubble along. It would be another two years before it interviewed the club boss, Ranogajec. To this day some members – including Walsh – have never been asked by the ATO for a formal interview.

Meanwhile, the club’s operations were expanding and the traditionally anarchic distribution arrangements and betting strategies were beginning to be reviewed.

Steicke, who had recently spent some time with his then wife and young son in Switzerland, suggested a more formal approach.

In August 2002, the four key players – Walsh, Ranogajec, Gatt and Steicke – met for the first “board meeting" of the elusive Punters Club.

The second, and final, meeting was held on January 12, 2003. It was a sweltering Adelaide summer’s day and the four punters met at Gatt’s mansion in Unley Park.

The palatial acreage was originally two separate blocks of land bought by Gatt in 1996 and has undergone extensive renovations since.

The key players gathered at lunchtime to discuss the future of the club. One of their key legal advisers, Russell Jamison, who the club stumbled upon through the law society when he completed a conveyance for one of them, was also present for part of the meeting.

Jamison soon became a close confidant and business associate and is now the sole shareholder and director of the largest of the club’s service providers, Data Processors.

There were four agenda items for the January meeting.

The first, which Jamison spoke on, was “tax issues and structuring" in relation to DP (Data Processors) and PC (thought to be the Punters Club).

Ranogajec then took over.

“Do we still have common objectives?" the agenda asked, under an action item from “ZR" about the “future direction of the bankroll".

“If so, what are they and how do we best achieve them?"

The group also discussed which global betting exchanges they should use, including the World Betting Exchange, and “what sort of deals if any we should do with other exchanges and the effect our association with WBX could have on any of this".

The proposed minutes, also obtained by the Financial Review, show Jamison suggested they should remove “any emails" between the Punters Club and Data Processors, and “that the IP be placed into a trust or similar".

The punters also determined how their investment in World Betting Exchange might affect their relationship with Betfair. “ZR [Ranogajec] will attempt to get a signed letter from Ed Ray of BetFair, that BetFair will guarantee that we will not be kicked-out of BetFair," the proposed minutes state. “In exchange, ZR can offer liquidity to some of the unimportant BetFair markets (eg: South Africa)."

But the minutes were never agreed and the failed plan eventually led to the dissolution of two keys members of the group: Gatt and Steicke.

Gatt had already begun to keep his winnings to himself, and Steicke was about to leave his wife. It is thought that was the last formal meeting between members of the club.

But the notes from that meeting were enough for the ATO to seize and later accuse the syndicate of destroying evidence.

Two years after the barbecue at Gatt’s house, darkness threatened to engulf the globally recognised poker player. In January 2005, Steicke left his wife, Elisabeth Capone, for the brighter horizons of Hong Kong.

By the time Steicke moved to Hong Kong the club was turning over $2 billion a year and was a truly global operation. Elisabeth, left in Adelaide and looking after a disabled son, waged all-out war.

She was convinced her ex had hidden gambling profits and assets overseas from his 15 years in the Punters Club and contacted both the ATO and the Australian Federal Police within months of her husband leaving her. She believed she had intimate details of the club and its complex operations and was prepared to trade on them.

When Elisabeth approached the ATO in 2005, it thought it had struck gold. For a time, the case of the Punters Club was being touted as the biggest tax fraud Australia had ever seen. Documents, the nature of which are still not known by the club today, changed hands.

The benign investigation had suddenly morphed into something much more sinister.

Despite what the ATO thought was explosive evidence, it did nothing for years. It was during this time the ATO began to believe the club had been hiding documents relating to its tax affairs. When the ATO received the information from Elisabeth, the case was moved to the serious non-compliance section and the commissioner himself asked to step in. Secret meetings took place in Adelaide between ATO officers Walter Vun and Peter Maxwell and associates and advisers to Elisabeth.

It is still not known what, if any, secret deal was hatched and whether a deed was agreed and signed. But it is clear from what has ensued in the courts that the ATO has used the documents in its possession.

A source familiar with the case said the first figure floated by the ATO for the tax debt was an incredible $1.86 billion. But despite 250 ATO employees working on the audit, no move was made. It was only late last year that the ATO began to issue assessments thought to total about $541 million, including interest and possibly penalties.

That was a big step down from $1.8 billion. Accusations of the biggest tax evasion Australia had ever seen were raised, and then dropped.

But some allegations remained.

The ATO believed the punters had been using encryption software to hide details of their $2.4 billion global gambling business from the authorities. It thought management discussions had been conducted orally so as not to leave a paper trail, and the effective control of service providers including Data Processors, which employ hundreds of people, had been concealed.

These allegations were denied by the club and have never been tested.

It is believed the board agenda, proposed minutes and the club’s document on how to answer the ATO were at the heart of these allegations, which are yet to be proven.

It was not until November 23, 2011, that the first amended assessments were issued on members of the club. In June this year, the fireworks began. The ATO launched major litigation, with these accusations and more, after Ranogaejc and Walsh disputed the assessments in the Federal Court.

But within four months a quiet deal had been reached, the details of which remain secret.

It is not known why the ATO backed down from a major offensive and 20 years’ of investigations.

Confronted with a public outcry, it seems the ATO struck a deal thought to be well shy of its huge initial claim.

Did the ATO have problems due to a lack of evidence or documents? Or was the hasty settlement a sign it did not want to become embroiled in years of costly litigation against a group that had very deep pockets?

There is also a possibility some of its key documents may have been legally privileged and unable to be deployed in court.

What is known is that the deal only relates to some of the members of the club, and both Steicke and Gatt’s grievances remain unresolved.

It is now likely to fall on the new commissioner, Chris Jordan, to decide whether to pursue a hard line. Jordan is a former KPMG partner, the same firm which the club went to for advice, and has made noises he will take a more commercial approach.